The Non-Merger Mergers In Nonprofit Finance

The Non-Merger Mergers In Nonprofit Finance

Thomas A. McLaughlin |

May 3, 2018

The two organizations and their respective management teams knew each other well. The geography that in the past had balanced their differences — and that had blunted the two groups in some ways — had been slowly overcome through a variety of factors such as the rise of digital communication.

But realities such as the impending retirement of one of the CEOs and a mild squeezing of the available workforce had prompted the two CEOs to consider a merger.

The discussion at their officially unofficial first meeting (in a bar) was relatively light and private, with each CEO gladly trying to match the other’s humor. But the possibilities and the implications of a merger were large and intriguing enough for both CEOs to want to explore the possibilities.

A pause is necessary here. The opportunity described above is fictional yet rooted in the reality of many years of actual experience. The relationship and choices are simplified to help the reader focus on this totally plausible opportunity without getting mired in the details.

Although nonprofit mergers have become accepted enough that most people in the sector take them for granted, many senior executives — and their board members, too — often have little to no experience in the process. This usually means that if a CEO is considering a merger, they will need to assess their executives and board members for their willingness to accept the proposal. More important, the leadership of both board and staff almost certainly will need to spend internal time explaining the idea to the organization’s non-executive ranks.

What can be confusing in a real-life nonprofit merger is that the common interpretation of the word “merger” is almost certainly confusing. Those not deeply embedded in the negotiations leading up to a positive decision are likely to assume that the two organizations will just, well, come together. They do need to “come together” but not necessarily in the TV sitcom fashion. In fact, two merging groups often have many different goals, and this is what makes the situation so potentially confusing to outsiders (and some insiders too).

The reality of this situation is unlikely to be understood by outsiders with no experience of this kind in the nonprofit world – or the for-profit world, for that matter. To illustrate how this can work, here’s a description of the preparation typical of two potential nonprofit partners interested in combining their operations on some level.

In classical terms, there are a variety of potholes that either or both parties can run into. Let’s assume that they have decided to blend their two entities into a single 501(c)(3) nonprofit public entity. To make things easier, for a moment slightly overlook the implications of managing two separately-branded entities in a single entity. (But, it is quite possible).

The name of either or both organizations is the least of the problem areas. One reliably messy area is “fringe benefits.” If one were to drill down into the deeper aspects of fringe benefits, such a merger would almost inevitably set up two pay scales. Bringing two management groups together can readily set off two-party internal arguments with the constant refrain of “that’s not fair.” This is because different pay scales might be manageable from an inside perspective, but not from the outside.

As an example, workers’ compensation is a required management element for nonprofits. It is virtually impossible that both groups would have made the same workers’ compensation choices, payment schedules, etc. As a result, there could be an imbalance in the workers’ compensation packages for which each group paid. In fact, the choices would be very likely to be different across the board based on things such as differing demands and legal requirements (rooted in workers’ compensation, possible state requirements, etc.).

Here’s the most common kind of internal choices for the ultimate structure of a two-entity collaboration (the complications haven’t even begun yet).
The most recognizable version occurs when two nonprofits join together. This can be tricky, on several levels. For one, the term “join together” is admittedly a bit misleading because it can be interpreted in different and sometimes inaccurate ways.

For instance, if nonprofit #2 agrees to be absorbed by nonprofit #1, the legal interpretation is that #2 goes away, leaving #1 to manage an enlarged single entity. The assets, personnel, (and the name, for a while) and so on for organization #2 will technically remain under #1, but the name of organization #2 will go dormant – unless both formerly separate groups decide otherwise.

If one were to have read this complete column from the smaller organization’s perspective, it might well have prompted a prolonged period of contemplation and/or hesitation. This is understandable in view of the many collaborations that we have handled over the recent years (plus those described above). But the Boomer generation, at least those who remained with smaller and/or less sophisticated groups, are facing multiple challenges: retirement, keeping abreast of the leaders in the field and (in many cases) prepping the next internal generation.

These are not insurmountable challenges. In fact, most of the details above are often encountered by organizations contemplating a merger. Largely because many locally known nonprofits are comfortable in their current environment, the concept of a “merger” can create fear among the smaller and/or struggling groups. But these developments are subject to change, though almost certainly not with the spirit of innovation that the Baby Boomers initially brought to the field. The all-in focus on society from the 70’s has morphed into the norm in this still-new century.

Thomas A. McLaughlin is the founder of the nonprofit-oriented consulting firm McLaughlin & Associates. He is the author of Streetsmart Financial Basics for Nonprofit Managers (4th edition), published by Wiley. His email address is tamclaughlin@comcast.net